The Ambassador in China (Johnson) to the Secretary of State

No. 372

Sir: I have the honor to refer to correspondence with the Department in reference to particular phases of the present trend of the Chinese Government toward governmental direction of large scale industries and particularly to my telegram No. 87 of February 23, 2 p.m.,41 giving the gist of the manifesto issued at the close of the Third Plenary Session of the Fifth Central Executive Committee of the Nationalist Party on February 22, 1937, which manifesto gave a general description of the government’s policy of supervising light industries and controlling heavy industries, with the effect of introducing what approximates “State Capitalism” in China.

. . . . . . . . . . . . . .

Taking everything into consideration, I am distinctly of the impression, already suggested by the Embassy in earlier reports to the Department, that the Chinese Government is strongly attracted by the idea that its current deficit, estimated by some at at least twenty million dollars Chinese currency each month, may in part be met by Government participation in the industry and foreign commerce of the nation, and that the motive of profit is just as strong an incentive to its launching into business as the desire to develop private earning power. This idea is disclaimed by Chinese officialdom. The Chinese [Page 574] Government asserts, with a great deal of warrant, that during recent years it has greatly lessened the burden of taxation which previously hampered individual enterprise in China. In official utterances, including the manifesto already referred to, it has been emphasized that the aim of the government is to carry out the Kuomintang principle of “the livelihood of the people” and that the present program of Governmental assistance to industry and commerce is carried out, in many instances, at actual cost to the Government. The threat to private commercial enterprise, thus presented and denied, has become the subject of heated debate in China.

To offset the contention that the Government’s objective in economic matters is solely to foster individualist enterprise, and to support the supposition that the Government intends to go into business for itself, one might plausibly attribute to Chinese statesmen a line of reasoning somewhat as follows:

The National Government is unable to meet its current expenditures; in the twenty-six years since the overthrow of the Manchu dynasty China has even yet not succeeded in setting up a stable government based upon purely political principles and the concept that economic development must be left to individual private initiative; other countries, for example, Italy, Germany and the Soviet Union, have been converted into integral economic enterprises; the proclivities of the Chinese people trend far more toward commercial enterprise than to achievements of a purely political nature; obviously, therefore, the Chinese Government should lead the Chinese people to political and economic regeneration by making itself the actual leader and brains of the whole scheme of economic development, with the result not only of improving “the livelihood of the people”, but also of opening up for itself hitherto undeveloped sources of income. This incidental result would strengthen the Government in two ways, by solving its fiscal difficulties, and by attracting to the support of the Government the real talent of the Chinese people, that is, the talent for business development, as distinguished from the somewhat arid field of profitless political administration. Future developments may not support this tentative hypothesis, but I cannot but feel that its happy mingling of altruism and self-interest explains the efforts of the Government to effect economic reconstruction by taking over the management of various lines of production and commerce.

If it is true, as the Embassy strongly believes, that the Chinese Government is committed to the objective of excluding foreign merchants, and private enterprise in general, from certain important lines of commercial activity, or of imposing unpalatable conditions to their participation in such activity, it will be necessary for the American people to decide what, if anything, they wish to do about [Page 575] it. The Department is aware that both the American and British Legations have found to be practically futile appeals to Article XV of the American Treaty of 184442 and other promises of an earlier Chinese Government to maintain freedom of private trade. The Chinese Foreign Office feels that treaty arrangements made almost a century ago can not reasonably be held to bind a Chinese Government faced with an entirely new set of world economic conditions. The question seems to arise whether better results would not be reached if the American and Chinese Governments were to discuss the matter of trade restrictions in the two countries on the understanding that “managed economies” are recognized systems at the present time. One of the difficulties met with in an argument based solely on the assertion of a right granted by China to the United States, is that it affords no opportunity to concede any reasonableness to the Chinese contention that their monopolistic programs are legitimate attempts to foster, by Government aid, domestic industries and promote the interests both of the producers and of the foreign consumers. The only outcome of an argument conducted on the present rigid lines would seem to be unconditional surrender on one side or the other, and a spirit of antagonism is engendered which is not conducive to a settlement. The discussions would be conducted in a better atmosphere if experts of the two countries were to discuss trade restrictions with the avowed purpose of ascertaining what the economic needs of both countries are and of adjusting trade relations to meet those needs. Government interference with export or internal trade is perhaps not so important in the United States as in China, but the regulations governing the exportation of tin-plate scrap would be a case in point (see Press Releases, December 12, 1936).

It is possible that the Department feels that such discussions might encourage the Chinese Government to press the request it made on December 23, 193343 for a new commercial treaty between the two countries and that the Department does not feel that the time has yet come to negotiate a new treaty. The Counselor of the British Embassy recently stated that the British authorities were reluctant to take up a fundamental restatement of treaty relations at this time, because this would include the thorny subject of extraterritorial jurisdiction44 and the British authorities still felt that the Chinese Government was not in a position to implement whatever undertaking it might give in such matters.

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The point I should like to suggest for the Department’s consideration, without pursuing the ramifications of the subject, is that it would be useful to introduce a certain elasticity into our discussions with the Chinese authorities concerning economic relations, together with some of the spirit of give and take which characterizes current negotiations between the United States and other nations for reciprocal trade agreements.

Respectfully yours,

Nelson Trusler Johnson
  1. Vol. iii, p. 27.
  2. Treaty of Wang Hiya, signed July 3, 1844, Hunter Miller (ed.), Treaties and Other International Acts of the United States of America, vol. 4, pp. 559, 564.
  3. See telegram No. 935, December 26, 1933, 7 p.m., from the Minister in China, Foreign Relations, 1933, vol. iii, p. 567.
  4. See pp. 634 ff.